Germany: Commercial Landlord And Tenant Law

I. Landlord rights of the property buyer prior to transfer of ownership

By Leonie Munz

Purchase agreement regarding a property with a rented flat

In its ruling of March 19, 2014 (VII ZR 203/13) the Federal Supreme Court (BGH) has arrived at the conclusion that the landlord is entitled to authorize the purchaser already prior to the transfer of ownership to assert the rights of the landlord in his own name. It is not necessary to disclose the authorization regarding the effectiveness of the legal transaction made on the basis of the authorization.

Contractual rights of the property purchaser prior to the transfer of ownership

The ruling is based on the following facts: The landlord (seller) and the purchaser concluded a notarial purchase agreement for a property to which the rented flat formed part. The purchase agreement entitled the purchaser to issue towards the tenants, immediately and until the complete transfer of ownership in the land register, all statements under landlord and tenant law and to conduct respective legal proceedings in his/her own name. Prior to the transfer of ownership in the land register the purchaser addressed the request of a rent increase to the tenant, which the tenant accepted without requiring any authorization. Subsequently the tenant demanded his rent back because the purchaser (and later acquirer) had only pretended to be in the position of a landlord. The action remained unsuccessful.

Difference between authorization (Ermächtigung) (§ 185 German Civil Code (BGB)) and power of attorney (Vollmacht) (§ 166 Sec. 2 German Civil Code (BGB))

Since the clause in the notarial purchase agreement had granted the purchaser the right for taking action in his/her own name, the Federal Supreme Court (BGH) has assumed an authorization (Ermächtigung) (§ 185 German Civil Code (BGB)) and not a power of attorney (Vollmacht). The holder of rights can principally authorize a third party to assert dependent rights to alter a legal relationship in his/her own name. The purchasers automatic move into the position of the landlord and the transfer of ownership pursuant to § 566 German Civil Code (BGB) did not exclude the prior authorization of the acquirer to assert claims in his/her own name.

No duty to disclose

It was not necessary for the effectiveness of statements made by the authorized person to disclose the authorization. If claims were made against the tenant from a person other than the original landlord, he was entitled to first of all be provided with the evidence of authorization if he doubted that a power of attorney or an authorization existed or a transfer of rights pursuant to § 566 German Civil Code (BGB) had taken place. Thus the tenant was sufficiently protected.

Practical considerations

The ruling of the Federal Supreme Court (BGH) has been delivered for a rental contract of a flat. It identically applies to cases of commercial tenancies which exist more often: If a third party that is not the original landlord exercises rights to alter a legal relationship (for example, termination), without providing evidence of authorization the tenant is entitled to immediately reject the statement. If the tenant rejects the statement immediately, the third party is entitled to repeat the statement together with the respective evidence (an original document of the authorization is necessary – a possibly certified copy – does not suffice!); however only this second statement "counts" for instance with reference to the compliance of specific deadlines to be met.

II. Content of fulfilment obligations of the landlord – No entitlemenet of the tenant to the modernisation of a heating system – working in accordance with the contract –

By Dr. Moritz Ulrich

In its ruling of December 18, 2013 – XII ZR 80/12 the Federal Supreme Court (BGH) has made it clear that in case of a commercial tenancy ("at least in that present case") there is no entitlement of the tenant to the modernisation of an existing - uneconomical but flawless - heating system which corresponds to the contractual agreements.

Comprehensively refurbished commercial real estate with an unmodified distance heating system – contractually agreed and actually reaching heating output

The plaintiff requested from the defendant outstanding rent. The parties had signed a rental agreement for commercial premises regarding an older building, which had been comprehensively refurbished by the plaintiff prior to being taken over. The existing district heating system, which could only be regulated centrally, as well as the existing ventilation system remained unchanged. The parties made the building specification of the landlord content of the rental agreement. As far as the heating system was concerned, it had been regulated that the supply air should be centrally heated during the heating period up to an outside temperature of approx. 18 degrees Celsius and should be made available in the rental area. Furthermore the landlord was supposed to provide a separate connection for the supply of the communal areas and of the offices in order to reach a room temperature in those rooms of up to 21 degrees Celsius. The systems complied with those requirements. The defendant reduced the rent by arguing that the heating and ventilation system was oversized with respect to the low public traffic on the premises and could not be adjusted according to demand: they could not be operated economically.

No entitlement to modernisation without agreement

The Federal Supreme Court (BGH) has stated: The rental object was not defective within the meaning of § 536 German Civil Code (BGB). Allthough the rental contract did not refer to an express agreement concerning the technical equipment of the rental object it contained, however, the kind of information which could be taken into account for interpreting the target condition to be identified.

Decisiveness of technical standard at construction time: no entitlement to claims from § 535 Sec. 1 Sent. 2 German Civil Code (BGB) or § 536 Sec. 3 Sent. 1 German Civil Code (BGB)

The inefficiency of operating the heating and ventilation system did not result in a defect of the rental object. It corresponded to the decisive technical standard at the time the building had been built and it operated free from defects. If the non-economical operation of the heating system existing upon completion of contract resulted in a defect, as represented in parts of the literature, the landlord would be required to technically change the system to (§ 535 Sec. 1 Sent. 2 German Civil Code (BGB)). However, the law did not provide such a duty of modernisation. The efficiency principle anchored in the residential landlord and tenant law in § 556 Sec.3 Sent. 1 German Civil Code (BGB) did not lead to any other result either.

Practical considerations

Decisive for assessing the technical standard of a rental object are the norms applicable at the time when the building was built. However, even in case of older buildings the technical standards applicable upon completion of the rental agreement can be decisive for assessing the defectiveness if – other than in the present case – the landlord carried out structural alterations on the rental object which were comparable to a new building or to a substantial modification of the building (Federal Supreme Court (BGH), ruling of June 5, 2013 – VIII ZR 287/12).

From the perspective of the landlord particular attention should be paid to the information provided thus interpreting the target condition which forms part of the rental agreement in order to be able to successfully counter demands for reduction occurring at a later stage.

III. Written Form Requirement – valid unilateral adjustment of advance payments of operating costs by the General Terms and Conditions

By Dr. Rainer Burbulla

On February 5, 2014 (XII ZR 65/13) the Federal Supreme Court (BGH) has ruled that the contracting parties can - with respect to the rent for commercial premises – effectively agree in General Terms and Conditions the landlord's right, by means of a unilateral statement to adjust the amount of the operating costs advance payment subsequent to the operating cost statement. Exercising this right of adjustment is not subject to the written form requirement as set forth in § 550 Sent. 1 German Civil Code (BGB).

Unilateral adjustment, as per contract, of the advance payments of operating costs by the General Terms and Conditions

The parties had agreed to an amount of 1 2,061.90 as monthly net advance payment for the incidental rental costs incurring. As far as the amount of the advance payments of service charges was concerned § 5 Clause 1 of the rental agreement specified: "Potential credits or subsequent claims resulting from an advance payment of incidental costs have to be mutually balanced with immediate effect. In these cases as well as in case of an increase or a reduction of the incidental costs the landlord is entitled to newly determine the advance payment to be made on a monthly basis." Since the incidental costs statement of 2005 resulted in a subsequent claim of a net amount of approximately 1 5,200.00 the landlord informed the tenant in writing that an adjustment of the advance payments of incidental costs became necessary and that the advance payments of incidental costs had to be increased to a monthly amount of € 3,391.47 as of August 2007. Subsequently the tenant paid that amount. In March 2009 the tenant terminated the rental agreement by invoking a violation of the written form, amongst other things, because the increase of advance payments of operating costs did not observe the written form of § 550 German Civil Code (BGB).

No violation of the written form clause

No interference with the protective purpose of § 550 German Civil Code (BGB)

The Federal Supreme Court (BGH) has negated the possibility of termination. The increase of the advance payments of operating costs did not lead to a violation of the written form requirement. The regulation provided for in § 5 of the rental agreement granted the lessor the right to newly determine the amount of the advance payments in the event of subsequent claims. This agreement corresponded in its meaning with § 560 Sec. 4 German Civil Code (BGB), a paragraph only applicable to residential tenancies. Whereas the landlord is entitled to adjust advance payments by a unilaterial statement in text form (§ 126 b German Civil Code) without requiring the approval of the other party. In line with this, § 5 of the rental agreement provided that the landlord's right to demand an adjustment of the advance payment by way of a unilateral statement. The contracting parties actually acted accordingly: The landlord informed the tenant about the higher amount of the advance payment to be paid as of August 2007 and the tenant followed that request without requiring further statements. There were no opposing legal grounds if the contracting parties agreed in case of the rent for commercial premises in the General Terms and Conditions that the landlord was entitled to adjust the amount of the advance payments of operating costs by a unilateral statement subsequent to the operating costs statement. That was not opposed by the protective purpose of § 550 German Civil Code (BGB). That paragraph intended to provide clarity for future property acquirers regarding the conditions of a long-term rental agreement. However there were also situations in which a comprehensive "provision of information" was not possible. This applied, for example, to renewals of rental agreements due to exercising the option right. In that case the acquirer would be sufficiently warned due to the renewal option agreed in the rental contract. Regarding the potential exercise of the option right he would have to gather information from the seller (lessor) or the tenant. The same applied to § 5 of the rental agreement. In that paragraph the need for protection of a property acquirer was taken into account the clause clearly indicated the possibility of a change in the amount of advance payments specified in the contract document.

Practical considerations

The provision of § 560 Sec. 4 German Civil Code does not apply to commercial landlord and tenant law. In order to enable landlords to adjust advance payments of incidental costs, the landlord should expressly provide an adjustment clause in the rental agreement. Such a clause is, according to the Federal Supreme Court (BGH) also possible in a standard form.

D. COMMERCIAL LANDLORD AND TENANT LAW

I. Landlord rights of the property buyer prior to transfer of ownership

By Leonie Munz

Purchase agreement regarding a property with a rented flat

In its ruling of March 19, 2014 (VII ZR 203/13) the Federal Supreme Court (BGH) has arrived at the conclusion that the landlord is entitled to authorize the purchaser already prior to the transfer of ownership to assert the rights of the landlord in his own name. It is not necessary to disclose the authorization regarding the effectiveness of the legal transaction made on the basis of the authorization.

Contractual rights of the property purchaser prior to the transfer of ownership

The ruling is based on the following facts: The landlord (seller) and the purchaser concluded a notarial purchase agreement for a property to which the rented flat formed part. The purchase agreement entitled the purchaser to issue towards the tenants, immediately and until the complete transfer of ownership in the land register, all statements under landlord and tenant law and to conduct respective legal proceedings in his/her own name. Prior to the transfer of ownership in the land register the purchaser addressed the request of a rent increase to the tenant, which the tenant accepted without requiring any authorization. Subsequently the tenant demanded his rent back because the purchaser (and later acquirer) had only pretended to be in the position of a landlord. The action remained unsuccessful.

Difference between authorization (Ermächtigung) (§ 185 German Civil Code (BGB)) and power of attorney (Vollmacht) (§ 166 Sec. 2 German Civil Code (BGB))

Since the clause in the notarial purchase agreement had granted the purchaser the right for taking action in his/her own name, the Federal Supreme Court (BGH) has assumed an authorization (Ermächtigung) (§ 185 German Civil Code (BGB)) and not a power of attorney (Vollmacht). The holder of rights can principally authorize a third party to assert dependent rights to alter a legal relationship in his/her own name. The purchasers automatic move into the position of the landlord and the transfer of ownership pursuant to § 566 German Civil Code (BGB) did not exclude the prior authorization of the acquirer to assert claims in his/her own name.

No duty to disclose

It was not necessary for the effectiveness of statements made by the authorized person to disclose the authorization. If claims were made against the tenant from a person other than the original landlord, he was entitled to first of all be provided with the evidence of authorization if he doubted that a power of attorney or an authorization existed or a transfer of rights pursuant to § 566 German Civil Code (BGB) had taken place. Thus the tenant was sufficiently protected.

Practical considerations

The ruling of the Federal Supreme Court (BGH) has been delivered for a rental contract of a flat. It identically applies to cases of commercial tenancies which exist more often: If a third party that is not the original landlord exercises rights to alter a legal relationship (for example, termination), without providing evidence of authorization the tenant is entitled to immediately reject the statement. If the tenant rejects the statement immediately, the third party is entitled to repeat the statement together with the respective evidence (an original document of the authorization is necessary – a possibly certified copy – does not suffice!); however only this second statement "counts" for instance with reference to the compliance of specific deadlines to be met.

II. Content of fulfilment obligations of the landlord – No entitlemenet of the tenant to the modernisation of a heating system – working in accordance with the contract –

By Dr. Moritz Ulrich

In its ruling of December 18, 2013 – XII ZR 80/12 the Federal Supreme Court (BGH) has made it clear that in case of a commercial tenancy ("at least in that present case") there is no entitlement of the tenant to the modernisation of an existing - uneconomical but flawless - heating system which corresponds to the contractual agreements.

Comprehensively refurbished commercial real estate with an unmodified distance heating system – contractually agreed and actually reaching heating output

The plaintiff requested from the defendant outstanding rent. The parties had signed a rental agreement for commercial premises regarding an older building, which had been comprehensively refurbished by the plaintiff prior to being taken over. The existing district heating system, which could only be regulated centrally, as well as the existing ventilation system remained unchanged. The parties made the building specification of the landlord content of the rental agreement. As far as the heating system was concerned, it had been regulated that the supply air should be centrally heated during the heating period up to an outside temperature of approx. 18 degrees Celsius and should be made available in the rental area. Furthermore the landlord was supposed to provide a separate connection for the supply of the communal areas and of the offices in order to reach a room temperature in those rooms of up to 21 degrees Celsius. The systems complied with those requirements. The defendant reduced the rent by arguing that the heating and ventilation system was oversized with respect to the low public traffic on the premises and could not be adjusted according to demand: they could not be operated economically.

No entitlement to modernisation without agreement

The Federal Supreme Court (BGH) has stated: The rental object was not defective within the meaning of § 536 German Civil Code (BGB). Allthough the rental contract did not refer to an express agreement concerning the technical equipment of the rental object it contained, however, the kind of information which could be taken into account for interpreting the target condition to be identified.

Decisiveness of technical standard at construction time: no entitlement to claims from § 535 Sec. 1 Sent. 2 German Civil Code (BGB) or § 536 Sec. 3 Sent. 1 German Civil Code (BGB)

The inefficiency of operating the heating and ventilation system did not result in a defect of the rental object. It corresponded to the decisive technical standard at the time the building had been built and it operated free from defects. If the non-economical operation of the heating system existing upon completion of contract resulted in a defect, as represented in parts of the literature, the landlord would be required to technically change the system to (§ 535 Sec. 1 Sent. 2 German Civil Code (BGB)). However, the law did not provide such a duty of modernisation. The efficiency principle anchored in the residential landlord and tenant law in § 556 Sec.3 Sent. 1 German Civil Code (BGB) did not lead to any other result either.

Practical considerations

Decisive for assessing the technical standard of a rental object are the norms applicable at the time when the building was built. However, even in case of older buildings the technical standards applicable upon completion of the rental agreement can be decisive for assessing the defectiveness if – other than in the present case – the landlord carried out structural alterations on the rental object which were comparable to a new building or to a substantial modification of the building (Federal Supreme Court (BGH), ruling of June 5, 2013 – VIII ZR 287/12).

From the perspective of the landlord particular attention should be paid to the information provided thus interpreting the target condition which forms part of the rental agreement in order to be able to successfully counter demands for reduction occurring at a later stage.

III. Written Form Requirement – valid unilateral adjustment of advance payments of operating costs by the General Terms and Conditions

By Dr. Rainer Burbulla

On February 5, 2014 (XII ZR 65/13) the Federal Supreme Court (BGH) has ruled that the contracting parties can - with respect to the rent for commercial premises – effectively agree in General Terms and Conditions the landlord's right, by means of a unilateral statement to adjust the amount of the operating costs advance payment subsequent to the operating cost statement. Exercising this right of adjustment is not subject to the written form requirement as set forth in § 550 Sent. 1 German Civil Code (BGB).

Unilateral adjustment, as per contract, of the advance payments of operating costs by the General Terms and Conditions

The parties had agreed to an amount of 1 2,061.90 as monthly net advance payment for the incidental rental costs incurring. As far as the amount of the advance payments of service charges was concerned § 5 Clause 1 of the rental agreement specified: "Potential credits or subsequent claims resulting from an advance payment of incidental costs have to be mutually balanced with immediate effect. In these cases as well as in case of an increase or a reduction of the incidental costs the landlord is entitled to newly determine the advance payment to be made on a monthly basis." Since the incidental costs statement of 2005 resulted in a subsequent claim of a net amount of approximately 1 5,200.00 the landlord informed the tenant in writing that an adjustment of the advance payments of incidental costs became necessary and that the advance payments of incidental costs had to be increased to a monthly amount of € 3,391.47 as of August 2007. Subsequently the tenant paid that amount. In March 2009 the tenant terminated the rental agreement by invoking a violation of the written form, amongst other things, because the increase of advance payments of operating costs did not observe the written form of § 550 German Civil Code (BGB).

No violation of the written form clause

No interference with the protective purpose of § 550 German Civil Code (BGB)

The Federal Supreme Court (BGH) has negated the possibility of termination. The increase of the advance payments of operating costs did not lead to a violation of the written form requirement. The regulation provided for in § 5 of the rental agreement granted the lessor the right to newly determine the amount of the advance payments in the event of subsequent claims. This agreement corresponded in its meaning with § 560 Sec. 4 German Civil Code (BGB), a paragraph only applicable to residential tenancies. Whereas the landlord is entitled to adjust advance payments by a unilaterial statement in text form (§ 126 b German Civil Code) without requiring the approval of the other party. In line with this, § 5 of the rental agreement provided that the landlord's right to demand an adjustment of the advance payment by way of a unilateral statement. The contracting parties actually acted accordingly: The landlord informed the tenant about the higher amount of the advance payment to be paid as of August 2007 and the tenant followed that request without requiring further statements. There were no opposing legal grounds if the contracting parties agreed in case of the rent for commercial premises in the General Terms and Conditions that the landlord was entitled to adjust the amount of the advance payments of operating costs by a unilateral statement subsequent to the operating costs statement. That was not opposed by the protective purpose of § 550 German Civil Code (BGB). That paragraph intended to provide clarity for future property acquirers regarding the conditions of a long-term rental agreement. However there were also situations in which a comprehensive "provision of information" was not possible. This applied, for example, to renewals of rental agreements due to exercising the option right. In that case the acquirer would be sufficiently warned due to the renewal option agreed in the rental contract. Regarding the potential exercise of the option right he would have to gather information from the seller (lessor) or the tenant. The same applied to § 5 of the rental agreement. In that paragraph the need for protection of a property acquirer was taken into account the clause clearly indicated the possibility of a change in the amount of advance payments specified in the contract document.

Practical considerations

The provision of § 560 Sec. 4 German Civil Code does not apply to commercial landlord and tenant law. In order to enable landlords to adjust advance payments of incidental costs, the landlord should expressly provide an adjustment clause in the rental agreement. Such a clause is, according to the Federal Supreme Court (BGH) also possible in a standard form.

IV. Written Form – valid unilateral notification of a rent increase due to a change of the consumer price index

By Dr. Rainer Burbulla

In the aforementioned ruling (X II ZR 65/13) the Federal Supreme Court (BGH) has additionally decided that a rent increase based on the index clause regarding rental agreements did not have to observe the written form of § 550 German Civil Code (BGB). That was also not changed by the addendum to the index clause according to which a written notification of the tenant in case of an increase were provided if a purely declaratory character was attributed to it according to the decisive interpretation made by the judges of fact.

Index clause with automatic adjustment

In the rental agreement for commercial premises existing between the parties the amount of the net rent was fixed until December 31, 2008. From January 2009 the agreed index clause in § 7 No. 1 applied. Accordingly, "the agreed rent is subject to change on each January 1 to the same extent as the consumer price index for Germany as a whole had changed either upward or downward and as identified by the German Federal Statistics Office. The adjustment of the respectively changed rent occurred automatically on January 1 of each year by a written notification provided by the landlord. The date of notification did not have any influence on the coming into force of the rent increase." The landlord asserted a rent increase due to an index change and requested the tenant to additionally pay the increased rent. The tenant terminated the rental agreement amongst other things because the rent increase made did not observe the written form of § 550 German Civil Code.

Declaratory effect of the adjustment notification – no need for a supplement

In the opinion of the Federal Supreme Court (BGH) the termination was ineffective. The indexation clause agreed in the rental agreement was effective. According to that clause the adjustment of the rent occurred automatically at the beginning of each year as of 2009. The respective contractual agreement was already part of the original rental agreement and, therefore, complied with the written form requirement of § 550 Sent. 1 German Civil Code (BGB). If the clause provided a written notification of the landlord, that notification would be of a purely declaratory nature and would not result in the fact that the contracting parties had to contractually conclude an index-related rent increase, for example, in an addendum to the rental agreement.

The Federal Supreme Court (BGH) has expressly confirmed the validity of existing and commonly accepted contractual practice according to which rent increases due to a change of the index principally take place "outside" the rental agreement by way of a separate letter regarding the rent increase.

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